Banks have started reducing interest rates on FDs
The direction of interest rates on bank fixed deposits appears largely to be tilted towards stagnation and reduction. Among major public and private sector banks, the State Bank of India (SBI) last revised interest rates on fixed deposits on February 15, 2023. HDFC Bank last revised interest rates on its fixed deposits on May 29, 2023. Later, it came up with special interest rates for two specific tenures. ICICI Bank last changed interest rates on its fixed deposits on February 24, 2023. Further, several major public and private sector banks have reduced interest rates since May 2023. Axis Bank, Punjab National Bank (PNB), Union Bank of India, and IndusInd Bank are among the banks that have cut interest rates on their fixed deposits in the last four months.Also Read: Five banks that have cut FD interest rates in last two months
Will interest rates on FDs drop now?
In this scenario, the next question that comes to mind is whether the banks will start reducing interest rates on FDs now. Answering this, Abhijit Talukdar, a SEBI Registered Investment and Founder of Attainix Consulting says, “Some banks may have started reducing FD rates, but this may be premature.”
Explaining it further, Anshul Gupta, Co-Founder and Chief Investment Officer, of Wint Wealth, says, “The weighted average domestic term deposit rate (WADTDR) on outstanding deposits increased by 10 bps in July. While few banks may have decreased rates, at a sector level, rates are still increasing. So, it would not be correct to say that rates have already peaked out, however, they are close to peaking out.”
Echoing the same sentiment, Abhishek Kumar, a SEBI Registered Investment and Founder of SahajMoney says, “Few banks have jumped the gun after anticipating that MPC would reduce repo rate in the next review cycle. But the recent hike in Consumer Price Index (CPI) might make RBI Monetary Policy Committee hold the repo rate for a few more quarters.”
“Leading banks with healthy Current Account Saving Account (CASA) deposits have reduced FD interest rates by 5-30 basis points (bps) and they are not expected to reverse it anytime soon. While such moves are aimed at helping banks to maintain a healthy credit-deposit (CD) ratio, it also alludes to their expectation of interest rates trending lower in H2FY2023-24. Investors should read this as a potential end to interest rate hikes and prepare themselves for lower earnings on their fixed-income investments,” said Raghvendra Nath, MD, Ladderup Wealth Management Pvt. Ltd.
All eyes on RBI MPC announcements on August 10: Repo rate likely to remain unchanged
All eyes will be RBI Monetary Policy Committee meeting being held between August 8-10. Reserve Bank of India Governor Shaktikanta Das will announce the decisions of the MPC on August 10, 2023. Going by the views expressed by many experts, it is expected to maintain the repo rate at its August 10 policy meeting. However, it will adopt a far more hawkish tone to fight against the recent hike in food prices, said economists and market experts. “We do expect a status quo decision by the MPC this time. Inflation while being lower than 5 per cent in June is expected to come closer to 6 per cent in July. The prices of vegetables as well as pulses will continue to exert upward pressure on food inflation. GDP growth in the first quarter is expected to be closer to 8 per cent in the first quarter thus indicating stability. There is, hence, no compelling reason to spur growth presently. Hence repo rate will remain unchanged till the end of the calendar year. Besides, the US Federal Reserve has indicated possible hikes in the future, and treasury yields have moved up. Further, with liquidity being comfortable stance of withdrawal of accommodation will remain. We expect no change in inflation and GDP forecasts,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
How upcoming RBI MPC decision is likely to impact FD investors
Throwing light on how upcoming RBI policy decisions will impact the banks and consumers, Adhil Shetty, CEO, of BankBazaar.com says, “We seem to be somewhere close to the peak, but interest rates haven’t moved in a linear fashion. The weighted average rate on new term deposits with commercial banks was 5.03 in August 2022 and it has risen to 6.34 in June 2023. But it has dipped from a peak rate of 6.48 in March. Since June we’re seeing an inflation spike, so there’s a degree of uncertainty with elevated inflation and we may see its impact on interest rates for a little longer. Policy decisions present opportunities for all concerned – for consumers to manage interest earnings from deposits and outflow on loans, and for banks to improve their margins. But if inflationary pressures persist, rates are likely to nudge up. The RBI will use all the tools of monetary policy available to it to contain the pressures.”
Adding to it, Nath explains, “RBI is most likely to maintain its hawkish stance and will pursue more measures to curb high inflation rates, especially by tightening the amount of liquidity available in the banking system. Consequently, banks are expected to maintain or lower the interest rates offered on saving instruments like FDs, with those having excess liquidity more inclined to reduce FD interest rates further. Investors would do well to take advantage of the current rates being offered and lock in capital before any potential reduction in FD interest rates.”
Withdrawal of Rs 2,000 notes have also impacted FD rates
The withdrawal of Rs 2,000 notes from circulation has also impacted the interest rates of fixed deposits. The move to withdraw Rs 2,000 notes from circulation is expected to add a sizeable quantum of around Rs 2 lakh crore of overall liquidity into the banking system by September 30. A good part of these currency notes will return to the banking system and may sit there for at least a year or so on average. This step will increase liquidity in the banking sector. So, banks do not require to reduce FD rates faster to attract depositors, explains Mayank Bhatnagar, Chief Operating Officer, FinEdge.
How should you choose your FD tenure now?
Should investors book FDs at the current rate before it drops? This decision will depend on the objective of the investor. “As the FD rates offered by the banks are still attractive, depositors can start booking FDs offering higher yields, especially if those rates are offered for longer tenures and match their investment horizon,” says Naveen Kukreja, Co-Founder and CEO, Paisabazaar.
“For investors who are largely dependent on interest income from debt instruments to cover their household expenses, it would be prudent to opt for FDs with longer tenure and take advantage of the current interest rates being offered. This is especially applicable to senior citizens who are eligible for slightly higher interest rates on FDs. However, in the scenario where the RBI reduces the repo rate, such investors could potentially enjoy higher returns on their FDs and maintain their current level of interest income for another few years,” says Nath.